LITHUANIA TO CHOOSE WESTERN STRATEGIC INVESTOR FOR GAS SECTOR PRIVATIZATION.

Publication: Monitor Volume: 7 Issue: 212

On November 14, Lithuania’s left-of-center government approved a privatization program for Lietuvos Dujos (Lithuanian Gas), the 92-percent state-owned importer and distributor of natural gas.

The long-awaited move is doubly significant. First, it resumes progress on energy sector privatization, which had stalled after having been launched by the predecessor Conservative government. That stoppage had recently caused the World Bank to postpone disbursement of a US$50 million tranche from the structural adjustment loan to Lithuania. Second and even more significant for the international implications, the government-approved program should safeguard Lithuania against a takeover of its gas sector by Russian energy giants. This decision is vital in the context of the country’s aspirations to join NATO next year and the European Union thereafter.

The program sets aside a 34-percent stake in Lithuanian Gas for sale through competitive tender to a Western strategic investor, one apt to “comply with the criteria for Lithuania’s European and trans-Atlantic integration.” Only firms from EU and NATO member countries (as well as those from the Organization for Economic Cooperation and Development, the group of advanced Western countries) may participate in the tender for the strategic stake. The strategic investor, once chosen, will exercise the operating rights in Lithuanian Gas.

Lithuania’s current suppliers of gas may not participate in the tender for the strategic stake, either individually or as part of international consortiums. The ban covers those suppliers’ subsidiaries as well. Also excluded are bidders with less than ten years’ experience as owners and operators of gas pipelines and distribution systems. All these restrictions refer in all but name to Russia’s Gazprom and Itera companies and their Lithuanian-registered proxies.

Prime Minister Algirdas Brazauskas told the press that the government prudently inserted these multiple safeguards in order to preclude doubts or surprises down the road. The Russian gas suppliers and their local subsidiaries will, however, be eligible to participate in the tender for a further 34 percent of Lithuanian Gas shares, after the strategic investor and operator will have taken over. The government would retain 24 percent, with the option to sell that on the stock market later.

The World Bank, having all along recommended that Lithuania select a Western strategic investor and operator, welcomed the government’s move. Leading Western firms that have already announced their intention to bid for the strategic stake include Germany’s Ruhrgas and Gaz de France.

Russia currently holds a monopoly of gas supplies to Lithuania, which imported approximately 2.3 billion cubic meters of Russian gas last year, and is set to show a slight increase in this one. It will take several years before North Sea gas can be delivered to the Baltic states and dent the Russian monopoly. Lithuania, along with her Baltic neighbors, has recently begun discussions with Norway and Denmark on the feasibility of laying gas pipelines from those countries’ offshore fields on the Baltic seabed (BNS, AFP, November 13-14).

Gazprom and Itera had campaigned for control of Lithuanian Gas, using three instruments at their disposal: suppliers’ leverage, local political lobbying and their Lithuanian-registered subsidiaries (such as the Western Lithuanian Industrial-Finance Corporation and Itera-Lietuva). Itera, a supplier in its own right to Lithuania, is using Gazprom’s pipeline system for delivering Itera’s gas.

Top managers of both Russian companies had recently descended on Vilnius to promote their model for privatizing Lithuanian Gas. Their basic proposal envisaged joint operating rights for Russian suppliers and Western investors, and the sale of three blocks of shares, 25 percent each, to the Western investors, the Russian suppliers, and the suppliers’ Lithuanian-registered subsidiaries, respectively. This would have been a recipe for Russian control, not only through the apportionment of shares, but also through the proposed “joint” operating rights. Western strategic investors as a rule insist on undivided operational control, and are likely to stay away rather than “sharing” operating rights with Russian energy giants (Baltic Times, September 13; RIA, Interfax, September 20-21; RosBusiness, September 24; BNS, DPA, October 1-2). The Lithuanian government’s November 14 decision has finally laid such ideas to rest.

This decision has responded to one of the twin challenges facing Lithuania. The other challenge is in the oil sector, where Russian suppliers are trying to squeeze out the American strategic investor, Williams International. At stake is the giant Mazeikiai refinery, its associated enterprises and–implicitly–Lithuania’s energy security, vulnerable to Russia’s monopoly on oil supplies. The Brazauskas government seems currently to balance uneasily between East and West on that issue. On the home run to the EU and NATO, the government ought to realize that no member country of those organizations would risk becoming dependent on a single, politically unreliable source of oil supply. This security consideration can be key to membership in organizations dedicated to risk-sharing and common security.

The Monitor is a publication of the Jamestown Foundation. It is researched and written under the direction of senior analysts Jonas Bernstein, Vladimir Socor, Stephen Foye, and analysts Ilya Malyakin, Oleg Varfolomeyev and Ilias Bogatyrev. If you have any questions regarding the content of the Monitor, please contact the foundation. If you would like information on subscribing to the Monitor, or have any comments, suggestions or questions, please contact us by e-mail at [email protected], by fax at 301-562-8021, or by postal mail at The Jamestown Foundation, 4516 43rd Street NW, Washington DC 20016. Unauthorized reproduction or redistribution of the Monitor is strictly prohibited by law. Copyright (c) 1983-2002 The Jamestown Foundation Site Maintenance by Johnny Flash Productions